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New PacSun CEO to focus again on surf and skate brands, add more footwear

By Brandon FerroAugust 21, 2009 5:40 AM

Talk of change was once again in the air during PacSun's second quarter earnings conference call with analysts Thursday afternoon. The call marked the first under the tenure of Gary Schoenfeld who took over from Sally Frame Kasak as President & CEO in June.

Gary spent a large portion of time during his prepared comments and Q&A explaining the need for PSUN to reclaim its brand identity and cache amongst teens.

Key Takeaways

After many strategic changes during Sally Frame Kasak's tenure, PSUN appears to be finding its strategic footing.

Gary Schoenfeld, the company's new President & CEO, used the company's second quarter earnings conference call to convey that the company needs to reclaim its image and heritage as a West Coast, surf/skate inspired teen retailer. He believes that much of the retailer's lost cache amongst teens can be reclaimed with sharper focus moving forward. Among other things, the company aims to facilitate this by reestablishing partnerships with core action sports brands, tweaking its assortments (including more footwear) and improving the shopping experience within its stores.

The company repeatedly identified the need to reestablish partnerships with core action sports brands.

Gary consistently noted the need for better partnerships with the industry's core, heritage brands and tone and tenor of such comments alluded to the need for more collaborative working relationships. For instance, he noted that PacSun can improve its co-marketing efforts with brands, noting the retailer has avoided sponsoring the Van's Warped Tour in the past much to the chagrin of many of its vendors which have.

The company will tweak its approach to merchandising.

The company reiterated its commitment to balancing assortments between core brands and private label merchandise within stores and noted that it does not expect a material change to the current mix. That being said, it also noted that it would like to layer in a greater amount of life-style, fashion and iconic brands such as Levi's and Nike, which will help broaden the appeal of the overall store concept.

The company will once again tweak its approach to footwear merchandising noting that the decision to exit the category in April 2008 has created a competitive disadvantage. Gary noted that footwear is core to PacSun's heritage and that the retailer will look to once again add a greater number of footwear SKUs in its stores. The company will not have an entire wall dedicated to the category like it did in the past, will not be as deep as it once was in skate footwear and selections will likely extend beyond just skate. PacSun currently carries roughly 12 footwear SKUs in 200 locations from only a handful of vendors.

Value format stores remain somewhat of a work in progress.

The company noted that it has 300 value locations excluding outlets. It believes it can improve the merchandise assortment in these locations as it works to better understand the differences in core vs. value store shopping dynamics. At this point it appears as if the company has yet to optimize the assortment and differentiation in its value stores relative to its core stores.

More focus will be placed on the in-store experience.

The company faulted its stores for historically lacking a sales oriented culture. More emphasis will be placed on achieving this with store associate training. The company also noted the opportunity to improve in-store marketing efforts and to improve the overall in-store customer experience.

Improving fundamentals are still a long way away as indicated in the company's third quarter outlook.

The company expects third quarter same store sales to decline in the high teens to low 20 percent range and expects to generate a loss of $0.16-$0.23 per share, which includes a $10 million pre-tax store asset impairment charge.

Second Results

Total Sales:

· -22% to $243 million including a 24% decline in same-store sales· Apparel sales declined by 19% and non-apparel sales declined by 45%· Weakness within apparel was driven by spring categories including shorts, swim and dresses· Sales of both men's and junior's declined by 24%· Denim remains a strong overall trend within the stores

Gross Margins:

· 23.8% or -6.7% vs. 30.5% last year· Lower merchandise margins accounted for 2.2% of the 6.7% decline in gross margins last year due to increased markdownsBalance Sheet· $26 million in cash and no borrowing based debt

Inventory

· -23% on a square foot basis vs. last year with 85% aged 90 days or le